Answer to Question #284756 in Economics of Enterprise for nicole

Question

Differentiate SHAREHOLDER WEALTH MAXIMIZATION from PROFIT MAXIMIZATION and describe why the former is the ultimate goal of financial management.

Cite your sources properly:

Answer 1

Solution:

Wealth maximization refers to the management of financial resources in order to increase the value of stockholders of the company. It mainly focuses on enhancing the value of stockholders of the company in the long term, including accomplishing a larger value of a company’s wealth, which is emulated in the increased market share of the company.

 

Profit maximization refers to the management of financial resources directed at increasing the profit of the company. Increasing the profit of the company in the short term is the main goal of profit maximization. It aids in accomplishing efficiency in the company’s day-to-day operations to make the business profitable.

 

 

A goal of financial management can be to maximize shareholder wealth by paying dividends and/or causing the market value to increase. Maximizing shareholder wealth is often a superior goal of the company, creating profit to increase the dividends paid out for each common stockholder and increasing the market value of the company. Wealth maximization is broad, looks into the future, and takes into account several risks thus the ultimate goal of financial management.